Under plans set out in an HMRC consultation document, those who design, market or facilitate the use of tax avoidance arrangements that are defeated by HMRC could have to pay a fine of up to 100% of the tax the scheme’s user underpaid.
While tax avoiders who are defeated by HMRC in court already face significant financial penalties, those who advised on, or facilitated, the avoidance currently bear little risk.
The government wants to deter enablers of tax avoidance and considers that financial sanctions would provide a tangible response by minimising the financial rewards those enablers would otherwise enjoy.
Frank Haskew, head of ICAEW's tax faculty
The government needs to be careful that in their efforts to wipe out avoidance schemes they don't prevent taxpayers from getting access to honest, impartial advice on the law
HMRC also proposed naming enablers who are subject to this new penalty in the interest of alerting and protecting taxpayers who play by the rules and to deter those who might otherwise be tempted to engage in enabling tax avoidance.
Jane Ellison, the financial secretary to the Treasury said, “Those who seek an unfair advantage, or who provide the services that enable it, and who then frustrate HMRC's efforts to identify, investigate and resolve these cases, should bear real risks and costs for their choices.”
The proposed sanctions aim to “root out” tax avoidance at source and target all those in the supply chain of tax avoidance arrangements.
The consultation document follows plans announced in the March Budget to explore further options to influence the behaviour of promoters and other intermediaries who enable or facilitate the use of tax avoidance and introduce downside for these enablers.
HMRC outlined that the penalties are not to be applied with the objective of raising revenues but should instead be designed to encourage compliance and prevent non-compliance.
The tax authority added that penalties should be proportionate to the services provided by the enabler and the financial reward they obtained and should be applied fairly, ensuring that compliant customers are seen to be in a better position than the non-compliant.
HMRC also said the penalties must provide a credible threat, adding that the authority must have the operational capability and capacity to raise it accurately and collect it in a cost-efficient manner.
The consultation document also clarifies the rules around whether proven tax avoiders have taken reasonable care to ensure their tax returns do not contain inaccuracies, making it simpler to enforce penalties when avoidance schemes are defeated.
“People who peddle tax avoidance schemes deny the country of vital tax revenue and this government is determined to make sure they pay,” Ellison said.
“The vast majority of their schemes don’t work and can land their users in court facing large tax bills and other costs.
“These tough new sanctions will make would-be enablers think twice and in turn reduce the number of schemes on the market.”
Richard Murphy, director of Tax Research, said,” Tackling the supply side of tax abuse is key to beating it.”
Murphy welcomed the proposed new measure but suspects it will be used very rarely.
However, he added, “The professional indemnity insurance premiums of those engaged in tax avoidance will sky-rocket even if no penalty is ever charged.
"The consequence will be that accountants and lawyers will simply not be able to afford to undertake this activity, whether they are ever caught doing it or not.
"And that will mean that the tax avoidance market is likely to die because UK lawyers and accountants are required to hold professional indemnity insurance as a condition of advising the public.”
“I am under no illusion: the definition of tax avoidance that this legislation will use may well be narrow and that may appear to restrict its scope. But it’s the knock knock effect in the professional indemnity insurance market that will really kill the sale of tax abuse. And I suspect every honest accountant and lawyer in the country will be cheering about that.”
Bill Dodwell, head of tax policy at Deloitte said, "We welcome this consultation and are looking forward to responding to the proposals set out by the government. We will need to look carefully at what might be in scope, as well as at the proportionality of any possible penalty.
"Taxpayers are entitled to advice and it would not be right to deter responsible advisers by introducing unclear and wide-ranging penalties. We support the work of the tax and accounting professional bodies in strengthening their standards for tax advisers."
Barry Johnston, ActionAid's director of policy
This is a welcome early move from the prime minister to show she is taking the issue of corporate tax avoidance seriously
Frank Haskew, head of ICAEW's tax faculty, said, "The government needs to ensure any new rules are targeted only to tackle those advisers that promote aggressive tax schemes rather than the vast majority of reputable advisers engaged in ordinary tax planning."
“Anecdotal evidence suggests that many of these promoters are based offshore and operate outside of any regulatory framework, so actually hitting them with a penalty may prove more difficult in practice,” Haskew added.
“If the measures now proposed are too widely targeted, there is a danger that reputable professional advisers could still end up being caught in the crossfire when advising on legitimate tax planning, while the real targets escape any penalty.”
The Freelancer & Contractor Services Association (FCSA), the UK’s largest independent trade association for accountancy providers and umbrella firms, also raised concerns that some accountants and advisors could face fines even if the advice given is not illegal. The FCSA said care needs to be taken to target inappropriate behaviour without capturing well-intentioned advisors.
Julia Kermode, chief executive of FCSA said, “For too long unscrupulous advisors have been getting away with promoting tax avoidance schemes with no repercussions so we support the government’s proposals to stamp out such unethical practices.
"However, I would like to fire a note of caution to HMRC that accountants could end up being penalised even if the advice given is not illegal. FCSA will be working closely with HMRC and policy makers to ensure that the new proposals are robust and avoid any unintended consequences.”
John Cullinane, policy director at the Chartered Institute of Taxation, said, "The government needs to be careful that in their efforts to wipe out avoidance schemes they don't prevent taxpayers from getting access to honest, impartial advice on the law. Definitions will be crucial."
“It is far from clear that a definition drafted for ‘enabling’ a criminal offence will be appropriate for defining an activity which, while undesirable in the eyes of most people, is legal, provided all appropriate disclosures are made to the tax authorities.
“Words like ‘assist’ and ‘facilitate’ are extremely vague. They will need to be carefully defined so it is clear what kind of activity is being targeted.
“The challenge for the government is to frame legislation which will achieve their objective of preventing those who devise and market avoidance schemes from profiting from that activity, while maintaining the right of taxpayers to obtain full and expert advice on complicated and often unclear areas of law, enabling them to sensibly plan their tax affairs within the law and not lay themselves open to large, unintended tax bills.”
A spokesperson for KPMG said, “We recognise that there’s a potential conflict between a tax payer’s right to minimise their tax liability and the duty they have to society to pay a fair amount of tax. We think about and treat this very seriously and have codified our approach in our UK Principles of Tax Advice.
“Times have changed and the debate around tax has changed too. What was seen as acceptable behaviour is no longer regarded as appropriate. Most taxpayers, and advisers, understand this and accept the need for responsible tax behaviour.”
John Cullinane, policy director at the Chartered Institute of Taxation
Words like ‘assist’ and ‘facilitate’ are extremely vague. They will need to be carefully defined so it is clear what kind of activity is being targeted
Kevin Nicholson, head of tax at PwC said, “We welcome the opportunity to participate in this consultation process and look forward to contributing on this matter. We support the efforts to ensure there is greater clarity in this area. We have been working with the professional accountancy bodies to ensure that the standards governing the work of our profession are fit for purpose and have appropriate safeguards and will continue to do so.
“It is important that taxpayers are able to understand and navigate our increasingly complex tax rules, as they transact, invest, and grow. The overwhelming majority of taxpayers who seek advice do so in order to ensure they are able to understand the law and meet their reporting and compliance obligations. Any new measures that are introduced must be appropriately targeted and proportionate so that the ability of taxpayers to receive independent professional advice is not adversely impacted.
“Any new regulation needs to be clearly articulated and understood, consequently we welcome the government's approach to enter into consultation on this important matter. A poorly directed measure would risk burdening the economy and HMRC alike, as taxpayers’ advisors seek clarification from HMRC on areas of uncertainty in the tax system before they are able to proceed with commercial transactions.”
A spokesperson for EY said, “EY’s clients seek our advice on a wide range of issues, including the most appropriate tax planning that is in compliance with the applicable laws and rules. EY strives to have an open and constructive relationship with tax authorities worldwide. We support improving certainty and transparency in the tax system and compliance with it.”
A spokesperson for BDO added, “It is important the profession continues to work with government and HMRC to create a tax environment that is fair and transparent. As a firm we will review and respond formally to HMRC during the consultation period.”
Jonathan Riley, head of tax, Grant Thornton UK LLP said, "The consultation document is not all new and builds on existing codes that apply to schemes and existing deterrents to structures that lack economic or commercial justification.
"Defeating outright artificiality has to be good for trust and it’s great that the government are consulting on how to do this, however government itself has a role in providing clear, unambiguous tax law, which all stakeholders want and will help contribute to a more vibrant economy.
"The regulation of tax professionals, by endorsing the professional conduct in relation to tax code (referred to in the condoc) and to which HMRC contributed, would be a good step towards partnering with the tax profession, as the vast majority of advisors spend their time helping clients to navigate a very complex regime."
Barry Johnston, ActionAid's director of policy said, “This is a welcome early move from the prime minister to show she is taking the issue of corporate tax avoidance seriously. Before the last election ActionAid called for new measures to tackle unscrupulous tax advisers who act with impunity and damage the reputation of the industry."
The consultation will run until 12 October and will be lead by John Burey, counter-avoidance directorate at HMRC.
The government is seeking views from members of the public, representative bodies, advisers and promoters, as well as businesses and individuals who may have received marketing material (even where they have not undertaken what that material proposed), taken advice about, or used arrangements which seek to avoid tax.
A response document will be published following the consultation period and any legislative changes will be taken forward as part of a future Finance Bill.